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U.S. Fed could set stage for rate hike

The U.S. Federal Reserve is expected to set the stage Wednesday for a rate hike as early as June, economists said.

In this Feb. 24, 2015 file photo, Federal Reserve Board Chair Janet Yellen testifies on Capitol Hill in Washington. The Fed this week is expected to drop “patient” in describing its approach to raising interest rates from record lows _ a signal that a rate hike is coming as soon as June.
(AP Photo/Susan Walsh, File)s so (Susan Walsh / AP)

A rate hike has become more likely as the U.S. labour market improves.

Unemployment fell to 5.5 per cent in February, its lowest level in almost seven years, as employers added 295,000 jobs, extending a string of strong job gains for the past 12 months.

However, the Fed is facing a delicate balancing act, observers also said.

While the job market is on fire, inflation is a bit too subdued for comfort.

Slow wage growth, low oil prices and a strong U.S. dollar, which make imports cheaper for Americans, have pushed inflation to dangerously low levels, creating a concern consumers will delay spending in anticipation prices will fall further.

“All told, we could see a muddled message (from the Fed) that could leave investors scratching their heads,” CIBC chief economist Avery Shenfeld wrote in a note to clients on Friday.

For Canadians, a U.S. rate hike could put further downward pressure on an already weakening Canadian dollar.

That could be good for Canadian exports but will raise the cost of imports, already seen in rising prices for fresh fruit and produce.

It could also be seen as a sign the U.S. recovery is strong enough to withstand a rate hike. That would be good for Ontario, which relies on exports, most of it to the U.S., for a third of its economic performance.

The U.S. economy is off to a slower than expected start to the year, economists noted.

The latest evidence, on Monday, was lower than expected confidence among U.S. homebuilders and a greater than expected decline in factory production in February.

America’s economy is expected to get back on track in the second quarter.

The Fed added the word “patient” to its December 2014 policy statement, in a move market watchers said indicated there would be no rate hikes for at least two months.

A quarter to half point increase in the Fed’s trendsetting rate would still leave U.S. interest rate near historic lows, economists noted.

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